IMF Financial Stability update highlights growing uncertainty, rising global risks

The International Monetary Fund (IMF) presented its latest Global Financial Stability Report (GFSR) during a press conference yesterday, outlining growing risks in global markets driven by heightened policy uncertainty and downward economic revisions.

Tobias Adrian, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, emphasized that global financial stability is facing increasing pressure from a combination of elevated asset valuations, rising global debt levels, and leverage risks in the non-bank financial sector.

“Our baseline scenario is one of rising downside risks and slightly weaker global economic activity,” Adrian noted. “While valuations in equities and credit markets have adjusted somewhat, they remain elevated by historical standards. We are monitoring these vulnerabilities closely.”

The IMF report identifies three main financial vulnerabilities:
1. Asset Valuations: Equities and risk assets remain highly valued, despite recent corrections, with credit spreads still relatively tight.
2. Leverage and Maturity Mismatch: Particularly within non-bank financial institutions, increased market volatility has triggered some deleveraging, though market functioning has so far remained orderly.
3. Global Debt: Rising public debt, especially in emerging markets, increases exposure to tightening financial conditions and could threaten stability if not addressed through fiscal reforms.

During the Q&A, IMF officials responded to questions on the effects of trade tensions, central bank independence, artificial intelligence in finance, and emerging market vulnerabilities. Jason Wu, Assistant Director at the IMF, highlighted that while some emerging markets have shown resilience, others remain at risk due to high sovereign debt and tighter global financing conditions.

The IMF also addressed recent movements in safe-haven assets. While gold prices have risen in line with typical risk-off sentiment, U.S. Treasury yields have also increased—unusual during periods of uncertainty. The depreciation of the dollar, despite elevated market volatility, was described as “notable but not conclusive,” with long-term safe-haven status not considered threatened.

Other key topics included:
• Artificial Intelligence: The IMF sees both opportunities and risks. While AI could enhance productivity and access to finance, concerns about cybersecurity and market concentration remain.
• Sovereign Debt in Emerging Markets: Nigeria’s return to Eurobond markets was cited as a sign of renewed investor confidence, though risks persist amid global uncertainty.
• U.S. Public Debt and Treasury Markets: While the IMF currently sees U.S. debt as sustainable, officials warned of challenges tied to rising issuance and potential liquidity pressures in the Treasury market.
• Geopolitical Risk: The IMF acknowledged increased geopolitical tensions as a relevant risk to market confidence, though current market reactions remain within historical norms.

On resilience building, IMF officials reiterated the importance of fiscal sustainability, robust regulatory frameworks, and strong institutional buffers. They stressed that financial institutions must be prepared for unexpected shocks, and that regulation remains crucial in maintaining stability.